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13 February, 2008
By Allison Orr

In a move that targets Google’s lead in online advertising and the web search market, Microsoft has proposed a US$44 billion acquisition of Yahoo.  Google’s lead in these areas have so far been insurmountable to Microsoft.  If successful, the deal would bring together two companies that have previously been rivals for web business and will create one of the world’s largest web companies. 

Microsoft is talking about the acquisition as a means to provide consumers which choice.  Microsoft chief executive Steve Ballmer said:

"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition.  Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers."

This week, a post on Google’s official blog said the Yahoo! bid "raises troubling questions" about the "underlying principles of the Internet: openness and innovation".  It goes on to say:

"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies -- and then leverage its dominance into new, adjacent markets."

On the same day, Microsoft responded with a statement that said that "the combination of Microsoft and Yahoo! will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising".  It also points out that "Google has amassed about 75 per cent of paid search revenues worldwide" and "more than 65 per cent search query share in the US".

The merger of these two companies would be particularly tricky in Australia, as Microsoft is in partnership with Channel 9 through NineMSN and Yahoo is in partnership with Channel 7 with Yahoo7.

So far Yahoo is fighting back, rejecting Microsoft’s offer as undervaluing the company.  Microsoft must now decide whether to increase its bid offer, consider a hostile takeover or withdraw.

ZDNet has put together a set of links on the continuing story.

Update 5 May 2008:
Microsoft has withdrawn its proposal to acquire Yahoo.  After rejecting their offer of $33 a share, Microsoft CEO Steve Ballmer said "the economics demanded by Yahoo do not make sense for us".


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